Divesting from Israel: Protest or Necessity?
To say all hell broke loose following Papaya Global CEO Einat Guez's announcement (the company is to "withdraw its funds from Israel") would be an exaggeration by just the slightest of margins, for hell did break loose.
Guez, a vociferous business leader and activist for women's visibility and progress within the Israeli High-Tech sector, did not shy away from criticizing the current government. On January 21st she stood on the stage in the hundred-thousand strong demonstration. She did not mince words.
But what are we seeing? An executive-gone-rougue, jeopardizing her company's fortunes for a politicized whim? Or maybe there is more than meets the eye. Disclaimer: I do not have any privy information about Papaya Global, and the following is a speculative analysis, aimed to induce learning and conversation.
A Quick Primer
To those not following closely the Israeli politics, I will recite my own understanding of the background leading to this unusual statement. Netanyahu's newly appointed minister of justice, Yariv Levin, has announced a so-called reform consisting of balance shifting moves, that are touted to "increase governability".
Notably, the reform disempowers the supreme court of Israel, mostly when deciding against either the legislation deemed unconstitutional.
The reform further changes the nomination process for justices in a way that render the government as an absolute power in the process.
The general view, as attested by the intellectual elites mass protests taking various forms, is that the balance of powers between the executive, legislative, and judicial branches is irrevocably disrupted in what is seen as the most severe constitutional crisis this country has ever known.
The power of the court to sanction legislation or actions of the government - specifically, using the reasonability cause - is all but nullified, awarding the government absolute executive powers and relinquishing any judicial control, necessary to protect individuals and corporation from misuse of such powers.
While other points in this initiative are to be taken issue of, this is the single most relevant to Ms. Guez's actions and recent declaration.
A Cross border Payroll Platform
Papaya Global is a cross border payroll platform, receiving funds from employers, processing them to pay employees in various geographies and legislation, assuring compliance with a myriad of work and tax legislations.
In the above diagram I speculate the way money flows through Papaya's system:
Once gross amounts due are calculated, employers send funds to pay their world wide employees.
Once tax and other mandatory deductions are calculated by Papaya's business rules, it pays the employees.
Crucially, Papaya holds funds in a transfer account, presumably in Israel, before transferring the salaries to said employees.
Risks and Occurrences
I can see several risks in the new situation that is brewing, and will try to list them from the most severe and unlikely, to the more benign, yet certain and harmful to Papaya's business:
Sudden taxation, seizure, embargo on expatriating funds. Yes, such a cataclysmic occurrence is rare. No, it is not impossible. Yes, it has happened in recent memory, in countries such as Venezuela, Turkey, Hungary (just this month - January '23). Sixty seven years ago Israel participated in a war waged by Britain and France against Egypt, in a failed attempt to recoup the nationalized Suez Canal. In another move, the British mandate in Palestine all but confiscated a significant part of real estate in Israel, locking landlords to their tenants - a decision who's impact is felt even today, 75 years later. If you are managing your customers' cash in an Israeli bank, it may be subject to this kind of risk. The funds could be confiscated, taxed, or locked. To a payment company, this is end-game. Admittedly, the chance this might happen is rather low. The implications - and hence, perceived risk, are intollerable.
Abrupt change in currency exchange rate. Currency fluctuations are an everyday occurrence in international business, and my guess is that Papaya's management is wise enough to hedge rate changes using tools such as forward contracts. Guess what: With the increased chance to abrupt rate changes, the cost of this hedge just went up. How deep it cuts into Papaya's margins is anyone's guess, but as a payment processor, it must be doing cents to every pass through dollar, and shouldn't be happy about increased costs.
GDPR: This came of left field, but as I was researching towards this post, I came across an article claiming that recent actions and inactions of the Israeli government (specifically during previous Netanyahu's tenure in the COVID outbreak) have all but jeopardizing Israel's good standing status in this aspect. When it comes to EU authorities safeguarding its citizens' privacy when their data are processed by local and foreign corporations, the blanket waiver cast over Israeli firms under the premiss of "general" compliance is now in question, again, posing a significant risk of increased expenses.
Actions and Declarations
As a venture capital backed, yet fast maturing company, Papaya's management have to react to protect their investors' assets, their customers' business, and its employee's welfare. Such decision is hard to take, as while its legal and tax implications are yet to be seen, on thing is certain: The amount of management attention that needs to be diverted to this initiative is non negligible.
Papaya Global is not the only company divesting from Israel. Other firms, such as Disruptive Technologies Venture Capital, have also taken (public) steps to protect their assets, or to look for greener pastures.
Other startups, corporations, and venture capital firms are undoubtedly considering - or have already taken similar steps - although choosing to keep lower profile at that.
The question remains why has Ms Guez chosen to come under the fire of Netanyahu loyal political operatives, and this maybe has to do with her commitment to the Israeli society, for which she is to be admired.